Launch of the SM&CR and the interaction with MiFID II · the SM&CR – 88% of firms are not sure that they will be ready for MIFID II on 3 January 2018 • It is anticipated that

PRECISE. PROVEN. PERFORMANCE.www.moorestephens.co.uk

Launch of the SM&CR and the interaction with MiFID II29 June 2017

Agenda

1. Introduction - Kelly Sheppard, Partner

2. Overview of the SM&CR - Teresa Mazur, Associate Director

3. SM&CR: banana skins - Andrew Jacobs, Director

4. Governance and organisational requirements: MiFID II interaction with

the SM&CR - Giovanni Giro, Senior Manager

5. Conclusion - Kelly Sheppard, Partner

PRECISE. PROVEN. PERFORMANCE.

Introduction

www.moorestephens.co.uk

Kelly Sheppard, Partner

Introduction

• Survey results

– 54% of firms have done some high level planning in respect of

the SM&CR

– 88% of firms are not sure that they will be ready for MIFID II

on 3 January 2018

• It is anticipated that some 52,000 firms will come under the

new SM&CR and some 92,000 individuals will now need to

be registered.


Overview of SM&CR

Teresa Mazur, Associate Director


Why SM&CR was introduced

• SM&CR is an accountability framework. It was put in place

following a review by the Parliamentary Commission on Banking

Standards (PCBS), on professional standards and culture in the

UK banking sector

• Improving standards within relevant firms is important to restore

trust in financial services

• The existing Approved Persons regime operates purely as a

gateway

• SM&CR does not change firms’ corporate responsibility

Why individual accountability matters

• Clarity for firms and regulators about each senior manager’s responsibilities

• Important part of the regulators’ drive to raise standards of individual conduct across

the financial services industry

• Linked to the FCA’s Business Plan 2017/18 priority ‘Firms’ culture and governance’:

• Senior managers need to ensure that their firm’s business processes, people and

other drivers of culture support and reinforce a culture that works in the long-term

interests of the firm, its customers and market integrity

Outcomes we seek…

Firms develop a culture of accountability at all levels and senior individuals are fully responsible and accountable for clearly defined business activities and material risks…


Extending the regime: who, when & how


Which firms are affected

Current regimes

• SM&CR applies to UK banks, UK branches of foreign banks, building societies, credit unions

and PRA designated investment firms

• Fewer of the Senior Managers Regime requirements apply to firms with gross total assets of

£250m or less

• Senior Insurance Managers Regime applies to (re)insurers

•Extending the regime

• The SM&CR will be extended to apply to all financial services that fall under FSMA

• The intention is for the extended regime to become effective in 2018

Which individuals are affected

Element of SM&CR Impacted staff and directors

Senior Managers Regime • Performs key role, eg, CEO, CFO, Chairman

• Holds key function – has overall responsibility for a whole area of the

firm

• Including NEDs excluding Notified NEDs

Certification Regime • Material Risk Taker / Significant Harm Function

• Previous Significant Influence Function

• CF30 with a qualification

• Line manager of Certified Person

Conduct Rules • All employees and directors other than ancillary staff

How and when?

• The PRA and FCA are consulting on how SM&CR will be adapted and applied to the diverse

range of regulated firms

• Proportionate application of SM&CR to reflect the size and complexity of firms

The Bank of England and Financial Services Act 2016 extends the SMCR to all sectors of the financial services industry. It also allows us to apply all elements of the regime to insurers. We intend that our extended regime will be clear, simple and proportionate. During Q2 of this year we will be consulting widely with industry, firms and consumers on our proposals. We expect implementation to begin from 2018.

SMCR: One year on – FCA news – March 2017


Key elements of the current regimes


Key elements of SM&CR

• Identify and allocate Senior Management

Functions (SMF) to named individuals

• Lighter touch for small firms

• ‘Statement of responsibilities’ (SoR) setting out

each Senior Manager’s specific responsibilities

• ‘Responsibilities map’ describing

management and governance arrangements

in comprehensive detail, including non-UK

and non-regulated activities

Senior Managers

Regime


• Senior Managers required to take

‘reasonable steps’ to prevent regulatory

breaches in their areas of responsibility

• Burden of proof lies with the regulators

• Outgoing Senior Manager to take reasonable

steps to ensure an orderly handover

Senior Managers

Regime

Duty of responsibility


• Certify as ‘fit and proper’ any individual who

performs a function that could cause

‘significant harm’ to the firm or its

customers

• Ongoing firm assessment of fitness and

propriety – at recruitment stage and annually

• Reassess if function changes

• Regime allows for up to four weeks’ cover

where the role does not require qualifications

Certification

Regime


• Personal characteristics (including good

repute and integrity)

• Competence, knowledge and experience

• Relevant qualifications

• Appropriate training

• Due diligence evidence to include:

– past business conduct references/

regulatory references

– criminal records checks

Certification

Regime

‘Fit and proper’ assessment


Individual Conduct Standards

• You must act with integrity

• You must act with due skill, care and diligence

• You must be open and cooperative with the

regulators

Additional FCA Conduct Rules

• Pay due regard to the interests of customers

and treat them fairly

• Observe proper standards of market conduct

Conduct Rules

First tier – applies to all

employees (excl. ancillary support

staff)

Consistent with current Statements of Principle for Approved Persons


• You must take reasonable steps to ensure that the

business of the firm for which you are responsible is

controlled effectively

• You must take reasonable steps to ensure that the

business of the firm for which you are responsible

complies with the relevant requirements and

standards of the regulatory system

• You must take reasonable steps to ensure that any

delegation of your responsibilities is to an

appropriate person and that you oversee the

discharge of the delegated responsibility effectively

• You must disclose appropriately any information of

which the FCA or the PRA would reasonably expect

to have notice

Conduct Rules

Second tier – Senior Manager rules


How the extended regime will affect

your firm


How the extended SM&CR might look

• The framework of the regime will be the same as the existing SM&CR – the

detail will be subject to consultation due later this year

• The duty of responsibility will apply to all firms (as per the FCA’s Policy

Statement PS17/9)

• SMF holders will still require regulatory approval

• Anticipated that Notified NEDs will not need SMF approval

• Anticipated that current customer facing CF30 approved persons will no

longer require SMF approval. May need to be certified

• Grandfathering over of current Approved Persons is likely, given how the

existing regime was implemented

How the extended SM&CR might look

like

• Implementation of the SMCR might be phased, as it was for banks

• Anticipated that small firms will be subject to fewer of the SM&CR

requirements or at least a watered down version – uncertain what this will

look like in practice

• Regulatory references will probably be required for Senior Managers and

certified staff

• Firms will almost certainly be required to train staff on the Conduct Rules

• We will probably see more disciplinary action by regulators against

individuals who are Senior Managers


How firms can prepare for the

extended regime


To start now...

• Categorise staff

• Allocate individual

responsibilities

• Statements of responsibilities

• Responsibilities map (smaller,

less complex firms will have

simpler maps)

Management & governance arrangements

Senior management

& their responsibilities

Reporting lines

Allocation of responsibilities

How management & governance arrangements fit within the

group

Responsibilities map includes:

Diagram extract from FCA’s ‘Strengthening Accountability in Banking’ slides – June

2015

How all

this fits

together

HR, Compliance & Legal need to

be involved from the outset

Plan for other tasks…• ‘Fit and proper’ assessments

• Staff training:

– Conduct Rules – virtually all staff

– Maintaining fitness & propriety of staff who will fall under the Certification Regime

• Contractual considerations:

– Employment contracts

– Staff handbook, internal codes of ethics/conduct

• Breach reporting

• Leavers:

– Provision of regulatory references

– Handover procedures for senior managers

• Ensure adequate resourcing – HR, Compliance and Legal (particularly HR who will have ongoing

increased workload)

Conclusion – Be prepared!

• Forewarned is forearmed:

– We know the extension of SM&CR is coming

– We know that, as a minimum, the basics of the current regime for banks

will apply across all firms

– SM&CR extension will mean significant change for most affected firms –

implementation and on-going compliance

– Get your project team together – include HR, Compliance and Legal

– Plan your work-streams and timescales

– Ensure adequate resourcing for implementation and the future –

especially HR

Start now - don’t wait until the FCA consultation has been completed!


SM&CR: banana skins

Andrew Jacobs, Director


Ongoing Individual

Accountability

Senior Managers Regime

Certification regime

Conduct Rules

SM&CR: composition

• Practical experiences

• Findings documented in FS 16/6,

16/7 & 16/8

• Learnings from our clients

• Best practises from peers and

regulators

• “..the Senior Managers regime is firm

wide issue for firms”

Andrew Bailey, June 2016

The common banana skins

1. Detail: insufficient detail to delineate the scope of an individuals responsibilities,

the specifics of responsibility

2. Lack of clarity: Responsibility Maps unclear about who is the most senior

person with responsibility and confused about non-executive oversight

3. Incompleteness: aspects of responsibility sharing are not adequately addressed

4. Lack of transparency: group considerations

5. Dynamic in nature: firm’s arrangements not reviewed and updated regularly or

ongoing certification and notification requirements were overlooked

Examples of where detail has been

missed

Not identifying all business activities

Issues with job titles

Confusion re. Notified Non Executives

Overreliance on SYSC 4 Annex 1G

Confusion re. Non-Executive Oversight

Inconsistencies between documentation

Failure to meet ‘practical and useable’ guidelines - SYSC 10C.11.25G

1) ExCo example

SYSC 4.7 (5-8R & 13G):

• Requirement to allocate prescribed

senior management responsibilities to

one or more senior managers of the

firm and must make clear the

allocation of the above, in such as

way that it is clear who has which of

those responsibilities

• At all times, one or more of its SMF

managers must have overall

responsibility for each of the

activities, business areas and

management functions of the firm

Board

Head of

Risk

Head of

Finance

Head of

Compliance

Head of

Sales

Head of

Operations

2) Board example

SYSC 4.7/11

• a person having overall responsibility for a function means a person who has

ultimate responsibility (under the governing body) for managing or supervising that

function and primary and direct responsibility for briefing and reporting to the

governing body about that function and putting matters for decision about that

function to the governing body

Board

Chair of

Risk Co.

Head of

Operations

Head of

ComplianceHead of

Finance

Chair of

Rem Co.

Chair of

Audit Co.

Head of

Sales

Non

Exec

Exec

3) Responsibility sharing

Firms should challenge themselves about:

1. Clarity, detail, overlaps and gaps

2. Whether individuals actually understand the extent and

limitations of their shared responsibility

3. Is the sharing of responsibilities necessary and

justified?

4. Guidance in SUP in respect of sharing and dividing

responsibilities when drafting a SoR.

5. In instances where an individual shares a certification

function, each individual performing that function will

need to be assessed. Conversely, where an individual

performs multiple certification functions their fitness

and propriety for each function will need to be

assessed

Statement of

Responsibilities

Responsibilities Map

SYSC 4.7

Group considerations

• Must include details of how the firm’s management and

governance arrangements fit together; detail the extent

to which the firm’s management and governance

arrangements are provided by, or shared with any other

members of its group or others

• A lack of clarity on how the relationship between the

firm and group influences or impacts the firm and the

senior management responsibilities in practice

• A ‘Group Entity Senior Manager’ will be introduced to

bring individuals employed by a parent, holding or other

group undertaking that exercises significant influence

into scope of the regime

• Where a firm reports to a group function that has a

strong influence on the decision making process within

the firm, these functions will usually be subject to the

SMR

Clarity in respect

of group

interaction

Responsibility Maps: Group considerations, management responsibilities and governance

Ongoing considerations

• Initial requirements

• Ongoing requirements

• Exit requirements:

- Senior Managers Regime

- Certification Regime / Conduct Rules

• Duty of responsibility:

- What constitutes reasonable?

- How to demonstrate the steps taken?

- How you should respond if

something goes wrong?

Develop

Implement

Evaluate

Triggers

SM&CR: Common Misconceptions

SM&CR is simply an iteration of

the Approved Person’s regime

SM&CR does not

involve any sensitivities

Minimal crossover

and linkage with other

systems/process

No involvement is needed from other business

areas

SM&CR is owned by

Compliance


Governance and organisational

requirements: MiFID II interaction with

the SM&CR

Giovanni Giro, Senior Manager


MiFID II and SM&CR

MiFID II

Corporate governance

Accountability of Management Body

Organisational requirements

Effective from

3 Jan 2018

SM&CR

Senior Managers Regime

Enhanced accountability of individuals

Conduct rules

Extends to all firms

in 2018

Management Body

• New definition of Management Body with extended responsibilities around governance (art. 9 MiFID II):

– Overall strategy

– Governance arrangements and segregation of duties

– Organisation of the firm’s business

– Access to management information

– Oversight of skills and competence of personnel

– Conflicts of interest policy

– Remuneration policy

• Extended application of CRD IV standards to all common platform firms

Members of Management Body

• Individual Members of the Management Body are personally accountable for:

– Sufficient time allocation

– Limited number of other directorships

– Good repute, skills and competence

– Decisions subject to challenge and scrutiny

– Subject to FCA assessment

• At least two executive members in Management Body

• Chairman ≠ CEO

• 1 exec directorship + 3 non-exec directorships

Organisational requirements

• New organisational requirements (art. 16 MiFID II):

– Effective governance arrangements

– Documented decision-making procedures

– Clear organisational structure and reporting lines

– Risk management framework

– Products and services governance policy and stress testing

– Initial and regular competence reviews

– Induction and training

• Management Body supported by Senior Management and independent Compliance and Risk functions

Analogies and overlap with SM&CR

MiFID II

Management Body role and function

Criteria for selection of members of Management Body

Allocation of responsibilities and segregation of duties

Corporate governance structure and arrangements

SM&CR

Requirements for Senior Managers

Enhanced competence and fit and proper standards

Statement of Responsibilities of SMF and Certified Person

Responsibilities map and Certification policy

Key considerations

Review Board composition and selection criteria

Update corporate governance policy

Coordinate MiFID II and SM&CR requirements

Assess skills and competence of all staff

Review individual roles and reporting lines

Management Body ≠ SMF

Training

Documents

Launch of the SM&CR and the interaction with MiFID II · the SM&CR – 88% of firms are not sure that they will be ready for MIFID II on 3 January 2018 • It is anticipated that